tax advantages of pensionThere are some attractive tax advantages to be had from investing in a pension. Are you aware of the pension tax benefits?

If you’re not aware, read on to see….

Let’s assume you want to invest £100 per month in your pension.

If you’re a basic rate taxpayer paying tax at 20%, you actually pay in £80 per month from your bank. The pension provider will then reclaims £20 from the tax man- HM Revenue & Customs (HMRC).

When added to the £80 you invested yourself this makes up your £100 contribution. The £20 from HMRC  represents tax at 20% on the £100 gross amount you earned. So in essence the tax man gives you back the tax you suffered on your earned income .

The tax man rarely gives us money back so we should all be taking advantage of this!

In short, you have paid in £80 and received £100 of value. Looks like a bargain!

Personally, I think all women’s brains are hardwired to enjoy a bargain. Some women like to spend their money on shoes and handbags, some on books, others on theatre trips or holidays. Whatever your spending habit is, we all enjoy a bargain.

And yet here we have what is in effect a 20% off sale which runs on a permanent basis and so many are not taking advantage of it.

The tax man giveth!

The position gets even better if you’re a higher rate tax payer paying tax at 40%. At the time of writing that means you are earning in excess of circa £41,450.

Under these circumstances, this is what happens:

As before you pay in £80 and the tax man (or woman!) contributes £20 to make up to your £100 monthly premium. However when you do your tax return and you note on your return your pension contributions, the tax man then recognises that to date you have only had 20% tax relief whereas you paid tax at 40%.

To bring your tax relief up to 40% the tax man will give you an extra £20 tax back. If you owe tax this will be deducted from the amount you owe. If you’re up to date with your tax then you will get a cheque in the post for £20.

Yes, you do actually get a reduction in or refund of tax.

You’ve initially paid £80 as a premium and then you get £20 back. The net amount you’ve paid is £60, but the amount into your pension pot is £100. I.e. you’ve received £100 of value but it’s only cost you £60.

If we said that the effect of a basic rate taxpayer was the equivalent of a 20% off sale, then a 40% reduction is the equivalent of blue cross day! Don’t miss out on this bargain- make sure you pay a regular pension contribution and receive your tax advantage.

A similar process also follows if you are a 45% taxpayer (earning over circa £159,440 at the time of writing). You pay in £50 but get £100 worth of value.

Too good an opportunity to miss!

If you are not contributing to a pension and would like to discuss whether this is appropriate for you please call me on 01932 698150 or email me on mary@mary-waring.co.uk

 Photo credit: Flickr/Simon Greig

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